Final answer:
The impact of deregulation and government weakening on inequality, specifically the separation of productivity and compensation, depends on the context and policy design. Government policies must balance between economic output and equality, as policies causing too much deregulation can indeed increase inequality, but well-designed policies can manage inequalities without substantially harming economic output.
Step-by-step explanation:
Deregulation and a sharp weakening of the government can indeed affect inequality, particularly relating to the decoupling of productivity and compensation curves. When government policies favor deregulation, there can be less control over market forces, which might lead to increased economic inequality. This is because such policies could amplify the already existing wage gap between high-skilled and low-skilled workers as market forces predominantly favor the demand for high-skilled labor. This can result in a disconnection between productivity gains and wages, especially for low-skilled labor. However, it is also true that an extremely high degree of redistribution and high taxes on the rich can reduce incentives for economic output. Government policies need to strike a balance, as there is a tradeoff between incentives for economic production and economic equality, which can lead to diverse outcomes in terms of public welfare and income distribution.
The tradeoff often illustrated in economic models shows that a moderate level of redistribution might not significantly harm economic output while reducing inequality. Countries like the United States, Canada, nations of the European Union, Japan, and Australia manage to achieve different levels of inequality with similar levels of income, suggesting that policies can be tailored to manage inequality without substantial impact on incentives for economic output. However, pushing for very high levels of equality might lead to diminished economic output due to reduced incentives. Thus, the answer to the original statement can be context-dependent and suggests that while too much deregulation and government weakening could increase inequality, carefully designed policies can improve equality without significantly harming economic incentives.